Image Credits : Ledger Insight
Decentralized finance appeared in 2009, with the emergence of bitcoin and its peer-to-peer concept to send money between users without an intermediate.
• With this new concept, we can wonder if it could lead to changes concerning our rights, especially privacy and data protection. Let’s compare the two systems.
In traditional finance, you need to share a lot of details about your private life. Indeed, when you go to the bank, you are required to do a KYC (“Know Your Customer”) and fill all the usual documents about your identity or your financial situation. Some data could be sensitive and should be handled carefully.
That is the reason why KYC procedures mostly have to comply with the GDPR. When you deal with sensitive data, especially from European citizens, it is necessary to respect several rules such as the following: good management of the data, safe and transparent transfer of the data etc.
Also, with KYC, there is always the issue of data security. All the data could leak if the systems are not well protected, and this would harm your privacy.
However, with decentralized finance (often called “DeFi”), you don’t need to follow all those formalities. Indeed, there is no intermediate and everything relies on smart contracts which define the rules in a trusted way. You only need a cryptocurrency wallet to make transactions. At first glance, it looks quite simple.
Image Credits : Yuichiro Chino / Getty Images
• So, could we say using blockchain gives total anonymity?
That is not true. In fact, when we use blockchain, every transaction is public. That means everyone can access all the transactions and see all the data: the amount, the identity of the sender, the identity of the receiver, the date…
In theory, there is no private information associated with a wallet, such as your name or mailing address. However, in practice, people usually share their wallet’s address to make transactions. Therefore, it could be possible to make the link between the address and the person.
• There is a paradox however, because the blockchain allows for anonymity but at the same time it authorizes anyone to see your transactions.
In traditional finance, it would be unimaginable to give anyone the possibility to check the activities on your bank accounts. As a matter of fact, it would be an infringement of privacy because the way you use your money should be considered confidential.
However, the concept of the blockchain revolves around total transparency. So, in a way, this makes it impossible to cheat the system.
Image Credits : fotomek – stock.adobe.com
• A solution exists : using a private blockchain
The possibility to use a private blockchain would solve the privacy problem. Indeed, it would only allow a select number of people from the organization to access the customer’s data. However, as decentralization is lowered, a better trust in the organization would be required.
Conclusion
Decentralized finance offers more possibilities compared to traditional finance and could automate certain procedures. Despite its advantages, it could be difficult to manage the private data properly as this concept is still new.
By Léonie Zaegel
